Financial Services SpeedRead: 4 July 2024 edition

Welcome to the latest edition of the Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead in more detail.

Financial Markets

1. FCA: Research note: Digital engagement practices: a trading apps experiment

On 20 June 2024, the FCA published a research note detailing the findings of its investigation into the use of digital engagement practices (DEPs) by trading apps and the effect such practices have on trading behaviours.

The FCA's findings reaffirm its expectation that trading apps closely scrutinise the effect of trading app design features on consumer investment decisions, including by ensuring that they are designed and tested to meet consumers' needs and enable them to make effective, timely and properly-informed investment decisions. Of particular importance, the FCA investigation found that the use of DEPs can increase trading volumes and the level of risk taken on by clients. This includes that:

• "Push notifications" and "Points and prize draws" were shown to lead to an increase in trading frequency (11% and 12% respectively), while the use of "Trader leaderboards" led to a 6% increase in the quantity of shares traded (though did not affect the total number of trades);
• while none of the DEPs examined led users to holding riskier portfolios at the end of trading, the use of "Push notifications" and "Points and prize draws" increased the proportion of trades clients made in risky investments by 8% and 7% respectively;
• the use of "Flashing prices" had no material impact on trading volumes or the number of trades. However, this practice did lead to a 10% reduction in engagement with key investor information; and
• the effect of DEPs was greater on younger people (i.e. those aged 18-34), women and those with lower financial literacy, with these persons therefore more likely to develop a riskier portfolio.

The FCA has warned firms that operate trading apps to review their use of DEPs, with a view to ensuring that this is consistent with delivering good outcomes for retail clients.

Banking and Prudential

2. Official Journal of the EU: Legislation: Delegated Regulation on regulatory technical standards on the scope and methods for prudential consolidation of an investment firm group under the Investment Firms Regulation

On 25 June 2024, Commission Delegated Regulation (EU) 2024/1771 of 13 March 2024 on supplementing Regulation (EU) 2019/2033 with regard to regulatory technical standards specifying the details of the scope and methods for prudential consolidation of an investment firm group was published in the Official Journal of the EU.

The Regulation enters into force on 15 July 2024.

3. EBA: Final report: Updates to disclosure framework finalising the implementation of the Basel III Pillar 3 framework (EBA/ITS/2024/05)

On 21 June 2024, the EBA published a final report containing draft implementing technical standards (ITS) on public disclosures by institutions which implements the changes in the Pillar 3 disclosure framework introduced by CRR III Regulation ((EU) 2024/1623).

The aim of the ITS is for market participants to have sufficient information to assess risk profiles of institutions and understand compliance with CRR III requirements. The ITS implements the CRR III prudential disclosures by including new obligations on output floor, crypto assets, credit valuation adjustment risk, credit risk, market risk and operational risk.

The EBA plans to complement these ITS with the CRR III disclosure requirements that are not directly linked to Basel III implementation later this year.

4. Official Journal of the EU: Legislation: CRR III Regulation and CRD VI Directive published

On 19 June 2024, the following legislation was published in the Official Journal of the EU:

• Regulation (EU) 2024/1623 of 31 May 2024 amending Capital Requirements Regulation (Regulation (EU) No 575/2013) as regards the requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CRR III); and
• Directive (EU) 2024/1619 of 31 May 2024 amending CRD IV (Directive 2013/36/EU) as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks (CRD VI).

This is the final text on the EU implementation of the Basel III standards as well as EU specific reforms.

CRR III will apply from 1 January 2025, with the exception of certain provisions in Article 1, which will apply from 9 July 2024.

CRD VI enters into force on 9 July 2024 and certain provisions in Article 1 shall apply from 29 July 2024.

5. Official Journal of the EU: Legislation: Delegated Regulation on regulatory technical standards on identifying connected clients under CRR

On 18 June 2024, Commission Delegated Regulation (EU) 2024/1728 of 6 December 2023 supplementing the Capital Requirements Regulation (No 575/2013) with regard to regulatory technical standards specifying in which circumstances the conditions for identifying groups of connected clients are met was published in the Official Journal of the EU.

The Delegated Regulation will enter into force on 8 July 2024.

Fund Management

No new entries.

Senior Managers and Governance

No new entries.

Financial Crime

6. FCA: Speech: Teamwork - a Smart way to tackle financial crime

On 26 June 2024, Steve Smart, joint executive director of enforcement and market oversight at the FCA, gave a speech at the Financial Services Investigations and Enforcement Summit on fighting financial crime, preventing harm and enforcing law.

Some key points arising from his speech are:

• The FCA is as much a law enforcement agency as a regulator and must be a step ahead of criminals, including by pre-empting the way that new technology is used (such as AI and deep fakes) to ensure systems and controls remain a step ahead.
• Collaboration and teamwork are key to the FCA's success – particularly the FCA's collaboration with partner agencies and industry, as firms stand to lose heavily from fraudsters and it is in mutual interest to tackle financial crime and fraud.
• The first step and ideal outcome is prevention and the FCA has done this by raising awareness through the ScamSmart campaigns which highlight the red flags of scams and encourage consumers to check the FCA's online Warning List.
• The FCA is focused on speeding up the pace of investigations and making the different components of the organisation such as enforcement, supervision and authorisations work together more seamlessly.

7. Official Journal of the EU: Legislation: Directive on cross-border law enforcement access to bank account registries published

On 19 June 2024, Directive EU 2024/1654 of 31 May 2024 amending Directive (EU) 2019/1153 as regards access by competent authorities to centralised bank account registries through the interconnection system and technical measures to facilitate the use of transaction records was published in the Official Journal of the EU.

The Directive allows designated competent authorities to access and search the centralised bank account registers of other Member States through the bank account registers interconnection system (referred to as BARIS) and use the transaction records for the prevention, detection, investigation or prosecution of serious criminal offences.

The Directive enters into force on 9 July 2024.

8. Official Journal of the EU: Legislation: AML Regulation, MLD 6 and AMLA Regulation

On 19 June 2024, the following three statutory instruments, which have the aim of strengthening the EU's AML/CTF framework, were published in the Official Journal of the EU:

• Regulation (EU) 2024/1624 of 31 May 2042 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing: This Regulation lays down rules concerning the measures to be applied by obliged entities, beneficial ownership transparency requirements and measures to limit the misuse of anonymous instruments. The Regulation enters into force on 9 July 2024 and will apply from 10 July 2027, except for certain obliged entities referred to in Article 3(3)(n) and (o) which apply from 10 July 2029.
• Directive (EU) 2024/1640 on the mechanisms to be put in place by Member States for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Directive (EU) 2019/1937, and amending and repealing Directive (EU) 2015/849: This Directive is referred to as MLD6 and will repeal the Fourth Money Laundering Directive ((EU) 2015/849) with effect from 10 July 2027. This Directive enters into force on 9 July 2024.
• Regulation (EU) 2024/1620 establishing the AML/CTF Authority and amending Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010: This regulation establishes the Authority for AML/CTF, the powers conferred to it and its objectives.

Retail Services

9. ESAs: Q&A: Updated Consolidated Q&A on the PRIIPs Key Information Document (JC 2023 22)

On 28 June 2024, the European Supervision Authorities (ESA) published an updated version of its consolidated questions and answers (Q&A) on the packaged retail and insurance-based investment products (PRIIPs) Key Information Document.

A new Q&A has been added under the heading "General Topics" regarding whether FX forwards fall within the scope of the PRIIPs regulation, with the answer being in the affirmative.

10. FCA: Webpage: Consumer Duty Information for Firms on Annual Board Reports

On 26 June 2024, the FCA updated its webpage on Consumer Duty – information for firms, with a new section detailing the requirements for annual board reports.

This section outlines the FCA's expectations on a firm's board, or equivalent governing body, to review and approve a report on the Consumer Duty outcomes received by its retail customers, at least once a year. In particular, it notes that the assessment should include:

• the results of the monitoring undertaken by the firm to assess whether products and services are delivering expected outcomes in line with Consumer Duty;
• any evidence of poor outcomes;
• an overview of the actions taken to address any risks or issues; and
• how the firm’s future business strategy is consistent with acting to deliver good outcomes under the Consumer Duty.

For firms with new and existing products and services, the first board report is due by 31 July 2024. The FCA has noted that it will review a broad sample of reports and will publish its insights to help drive good practice from July. Firms will not be required to submit their Board reports to the FCA but will be expected to provide this upon request.

Digital Finance and Fintech

11. ESMA/EBA: Final report: Guidelines on suitability of management body members and shareholders for entities under MiCA

On 27 June 2024, EBA and ESMA jointly published two sets of guidelines on the suitability of members of the management body, and on the assessment of shareholders and members with qualifying holdings for issuers of asset reference tokens (ARTs) and crypto-asset service providers (CASPs), under the Markets in Crypto Assets regulation ((EU) 2023/1114).

The first set of guidelines covers the presence of suitable management bodies within issuers of ARTs and CASPs, by, among other things, providing common criteria to assess their knowledge, skills, experience, reputation, honesty and integrity, as well as considerations regarding whether they can commit sufficient time to perform their duties to ensure a sound management of these entities.

The second set of guidelines is regarding the assessment of the suitability of shareholders or members with direct or indirect qualifying holdings in a supervised entity. It provides competent authorities with a common methodology to assess their suitability for the purpose of granting authorisation as issuers of ARTs or as CASPs, and for carrying out the prudential assessment of proposed acquisitions.

12. ECB: Report: First progress report on the digital euro preparation phase

On 24 June 2024, the ECB published its first progress report on the digital euro preparation phase which will last until 31 October 2025.

This report considers the progress made on key digital euro design features and outlines the ECB's planned next steps for the potential issuance of a digital euro. Of particular relevance, the report notes that:

• the ECB is designing high privacy standards to make online and offline digital payments as close as possible to cash transactions;
• the Eurosystem is conducting further testing and exploration into the technical aspects of the digital euro, including its offline functionality, testing and rollout plan;
• the ECB has started work on designing methodology for calibrating digital euro holding limit;
• the digital euro Rulebook Development Group has completed an interim review of the first draft of the rulebook, which sets out the rules and procedures to standardise digital euro payments across the euro area; and
• the ECB continues to provide technical input to legislative discussions with European co-legislators.

The next progress report on the preparation phase will be published in autumn 2024.

13. EBA: Guidelines and RTS: EBA publishes regulatory products under the Markets in Crypto-Assets Regulation

On 19 June 2024, the EBA published a package of technical standards and guidelines under the Markets in Crypto-Assets Regulation (MiCAR). The package includes:

• Guidelines on establishing the common reference parameters of the stress test scenarios for the liquidity stress tests referred in Article 45(4) of MiCAR;
• Draft Regulatory Technical Standards on the methodology to estimate the number and value of transactions associated to uses of asset-referenced tokens as a means of exchange under Article 22(6) MiCAR and of e-money tokens denominated in a currency that is not an official currency of a Member State under Article 58(3) of MiCAR;
• Draft Implementing Technical Standards on the reporting on asset-referenced tokens under Article 22(7) of MiCAR and on e-money tokens denominated in a currency that is not an official currency of a Member State pursuant to Article 58(3) of MiCAR; and
• Draft Regulatory Technical Standards on supervisory colleges under Article 119(8) of MiCAR.

The EBA will now submit the final draft RTS, ITS and guidelines to the European Commission for endorsement, following which they will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the EU.

14. European Commission: Targeted consultation: Artificial intelligence in the financial sector

On 18 June 2024, the European Commission published a targeted consultation on the application and impact of artificial intelligence (AI) in the financial sector.

The consultation specifically welcomes input from financial services stakeholders in relation to the following three areas of focus:

• the development of AI applications in financial services, including with regards to the use, benefits, challenges, risks and compliance burden associated with AI;
• specific use cases of AI in finance (e.g. banking and payments, market infrastructure, securities markets, insurance and pensions, and asset management); and
• the implementation of the AI framework set out in the AI Act, particularly in relation to high-risk use cases.

Responses to this consultation must be sent before the 13 September 2024, and can be submitted here. The EU Commission will then publish a report analysing its findings on the main trends arising from the use of AI within the financial services sector.

For further information on the AI Act, please see our previous briefing here.

Payments

15. FCA: Updated forms: Payment Institutions and Electronic Money Institutions

On 26 June 2024, the FCA published updated versions of the following forms:

• Application for Authorisation as a Payment Institution (11 June 2024);
• Application for Registration as a Small Payment Institution (10 June 2024);
• Application for Authorisation as an Electronic Money Institution (6 June 2024); and
• Application for Registration as a Small Electronic Money Institution (10 June 2024).

Firms should ensure to use the updated forms when applying to be authorised or registered in line with the above forms.

ESG

16. NGFS: Guide: Climate related disclosure for central banks

On 19 June 2024, the Network for Greening the Financial System (NGFS) published the second edition of its guide on climate-related disclosure for central banks.

This edition of the guide reaffirms the NGFS’s commitment to robust, globally consistent disclosure standards that are based on the headline disclosure recommendations in the Task Force on Climate-Related Financial Disclosures' (TCFD) framework. These headline recommendations are as follows:

• Governance – Disclose the institutional climate-related objectives and decision-making process of the central bank, as well as climate-related governance structures for specific areas and functions;
• Strategy – Disclose the climate-related impacts related to the central bank, as well as the strategy for handling these impacts;
• Risk Management - Disclose the processes for managing climate-related risks at the central bank, focusing on identification, assessment, and integration; and
• Metrics and Targets – Disclose metrics and targets relating to the central bank’s management of climate-related risks and exposure to climate-related risks and opportunities.

The guide offers flexible options tailored to central banks' specific circumstances, noting there is no one-size fits all solution for all central banks. It also emphasises the importance of transparency in the transition to a climate-friendly economy.

The NGFS has noted that will continue to help central banks navigate the landscape of evolving disclosure frameworks, and will further strengthen its role as a forum for central banks to share their practical experiences.

17. ESAs: Opinion: The assessment of the Sustainable Finance Disclosure Regulation

On 18 June 2024, the ESAs published a joint opinion on the Sustainable Finance Disclosure Regulation, in which they recommend to the European Commission several changes to improve the SFDR framework. The changes focus largely on investor disclosure, and are intended to help consumers better understand the sustainability disclosures made in respect of in-scope financial products.

The recommendations in the opinion include:

• introducing a product classification system, based on regulatory categories and/or sustainability indicator(s);
• introducing a financial product sustainability indicator, based on a graded scale;
• clarifying the concepts of "taxonomy-aligned" and "sustainable investment", with a view to ensuring consistent application of these terms across financial products; and
• potentially expanding the scope of the SFDR to align disclosure across different financial products.

For more information on the ESAs opinion, please see our briefing here.

Other

18. FCA: Webpage: New webpage for firms with overseas appointed representatives

On 27 June 2024, the FCA published a new webpage providing guidance for firms with overseas appointed representatives (OARs).

The webpage states that principal firms may have challenges overseeing and communicating effectively with their OARs due to a variety of reasons, including differences in legal, accounting and regulatory requirements.

The FCA outlines its expectations on principal firms. Among other things, it highlights the requirement to monitor and oversee OARs to account for any extra challenges that may arise and to ensure that the activities of their OARs do not result in undue risk of harm to consumers or market integrity.

The FCA also provides practical considerations for principal firms, such as considering the additional risks of having OARs when assessing its controls and resources when completing its annual self-assessment document.

19. Official Journal of the EU: Legislation: DORA Regulations published

On 25 June 2024, the following supplementary provisions to Commission Delegated Regulation (EU) 2022/2554 (i.e. the Digital Operational Resilience Act) were published in the Official Journal of the EU:

• Commission Delegated Regulation (EU) 2024/1772: specifies the criteria for the classification of ICT-related incidents and cyber threats, setting out materiality thresholds and specifying the details of reports of major incidents;
• Commission Delegated Regulation (EU) 2024/1773: specifies the detailed content of the policy regarding contractual arrangements on the use of ICT services supporting critical or important functions provided by ICT third-party service providers; and
• Commission Delegated Regulation (EU) 2024/1774: specifies ICT risk management tools, methods, processes, and policies and the simplified ICT risk management framework.

The Delegated Regulations will enter into force on 15 July 2024.